Educational Articles

Dow-30 Profile: The Coca-Cola Company

Value Line Research Staff
| April 09, 2013

Dow Jones Industrial Component The Coca-Cola Company (KO - Free Coca-Cola Stock Report) traces its roots back to 1886 – the year an enterprising Atlanta pharmacist named John Stith Pemberton ventured to produce a restorative tonic that, unlike the popular coca wines of the day (including his own), wouldn’t run afoul of newly enacted temperance laws. As the legend goes, Pemberton cooked up a syrupy brew in a three-legged brass kettle in his backyard. He then convinced a local pharmacy to combine the syrup with carbonated water and sell the new fountain drink at a nickel a pop. Fluid extracts from the coca leaf and the kola nut gave the new drink its restorative “kick”. The two ingredients also provided the inspiration for Pemberton’s bookkeeper Frank Robinson, who both coined the name “Coca Cola” and came up with the brand’s distinct cursive script.

Asa Griggs Candler purchased the business from John Pemberton over a three-year stretch (1888-1891). He then tirelessly worked to build the franchise. He, for example, passed out coupons for free samples and made sure that participating apothecaries were outfitted with all manner of Coke-branded fixtures. As a result, more and more people began visiting drug-store counters and ordering the new drink. Candler is also famous for selling the U.S. bottling rights for Coke to two Chattanooga, TN lawyers for the meager sum of one dollar. The move partly reflected a mistaken belief that consumers wouldn’t really take to portable drinks. To Candler’s credit, though, it also meant that the company wouldn’t be on the hook for building out a costly network of bottling operations around the country.

Reflecting near insatiable demand for Coke, the number of bottlers rose from just two in 1900 to nearly 1,000 twenty years later. The growing popularity of Coke gave rise to countless imitators, prompting the company to emphasize the authenticity of the Coke brand in its advertising and other marketing. With that in mind, it sponsored a design contest for product packaging. The winning contour bottle design, patterned after a popular hoop skirt of the day (1916), remains one of the company’s enduring trademarks.

Robert Woodruff took over the reins in 1923 and led the company for nearly 60 years. He began the process of transforming Coke into a global brand, through product tie-ins with international events like the Olympics. Meanwhile, his commitment to American GIs during World War II had the company shipping portable bottling plants to battle fronts in Europe and Africa, further establishing Coke’s global presence. Woodruff is generally credited with introducing such beverage-industry innovations as the six-pack and the standardized in-store cooler. During his tenure, the company also began to roll out new products. Fanta hit the shelves of U.S. stores in 1955. Sprite (1961), TAB (1963), and Fresca (1966) followed soon thereafter.

In the 1970s and early 1980s, the company struggled to increase sales and profits, partly due to emboldened competition in the U.S. market. PepsiCo (PEP), for one, became much more formidable and wasn’t shy about calling out its chief rival. In a now famous series of TV ads, it claimed that consumers overwhelmingly preferred the taste of Pepsi to Coke in double-blind taste tests. Coke’s own internal tests reportedly yielded similar results.

The onslaught from Pepsi led to one of the most controversial moves in the company’s history, namely the reformulation of the 100-year-old Coke recipe and the April, 1985 launch of New Coke. New Coke scored high in taste tests but was, itself, an unmitigated flop with consumers, prompting the company to bring back the old Coke (now named Coca Cola Classic) less than three months later. Ultimately, nostalgia for the Real Thing led to a strong resurgence in company sales, raising some to posit that New Coke’s flop was the biggest success of Roberto Goizueta’s tenure as Chief Executive. The launches of Diet Coke and Cherry Coke are just two of the inarguable triumphs of Goizueta’s watch.

Coca-Cola purchased Glaceau, the maker of Vitaminwater, for $4.1 billion, in June, 2007, marking the biggest acquisition in the company’s history. The move greatly expanded the company’s portfolio of "still" (non-bubbly) beverages, amid an ongoing consumer shift toward juices and bottled water. More recently, the company purchased the domestic bottling operations of its largest affiliated partners, largely ending the traditional separation between concentrate supplier and bottler that has existed ever since Asa Candler famously sold Coke’s U.S. bottling rights for one dollar.

Today, Coca-Cola is the world’s largest soft-drink company and owner of some of the most recognizable brands on the entire planet. On any given day, 1.6 billion servings of Coke, Sprite and other company-marketed offerings are consumed by people in over 200 different countries. Going forward, the company faces numerous challenges, including shifts in consumer tastes and increasing backlash against purveyors of “empty calories”. Still opportunities abound in so-called “functional” beverages and in emerging markets.

All told, Coca-Cola remains a worthy investment option for conservative investors. Over the past five years, the total return on these shares has lagged slightly behind that of the Value Line (Arithmetic) Index, and a similar pattern could very well prevail to 2016-2018. The stock, though, also carries significantly less risk than the typical equity in the Value Line universe. It gets our Highest rank (1) for Safety and our top score (100) for Price Stability. Also, the beverage maker typically pays out about half of its annual income in cash dividends, making KO shares a solid selection for current income.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.